First Look

First Look summarizes new working papers, case studies, and publications produced by Harvard Business School faculty. Readers receive early knowledge of cutting-edge ideas before they enter the mainstream of business practice. For complete details on faculty research, see our Working Papers section.

August 12

Why people become entrepreneurs

Increasingly, the field of behavioral economics is employed to gain better understanding of what drives consumers, employees, and other populations important to business. New research, detailed in the summer 2014 issue of the Journal of Economic Perspectives, applies behavioral economics to understanding entrepreneurs, specifically, "why certain individuals may be attracted to such an apparently unprofitable activity." Ramana Nanda and colleagues wrote the study, "Seeking the Roots of Entrepreneurship: Insights from Behavioral Economics."

Accounting for Apple

Apple is set to introduce a new generation of iPhones next month, if industry reports are to be believed. And if the past holds true, the new products will generate tremendous sales and fatten an already huge stockpile of cash. In a new case study, Mihir Desai and Elizabeth Meyer explore the company's financial policy to help students understand such skills as forecasting and cash distribution. The case is called, "Financial Policy at Apple, 2013."

Healthiest employees on the planet?

Johnson & Johnson aims to create the world's healthiest workforce. John Quelch and Carin-Isabel Knoop explore the company's "culture of health" to better understand the challenges and rewards of this effort, which includes teaching key health metrics, rewards for healthy behavior, and changes to the workplace environment. The case is titled, "Johnson & Johnson: The Pursuit of Wellness."

— Sean Silverthorne

Publications

Abstract—There is a growing body of evidence that many entrepreneurs seem to enter and persist in entrepreneurship despite earning low risk-adjusted returns. This has lead to attempts to provide explanations-using both standard economic theory and behavioral economics-for why certain individuals may be attracted to such an apparently unprofitable activity. Drawing on research in behavioral economics, in the sections that follow, we review three sets of possible interpretations for understanding the empirical facts related to the entry into, and persistence in, entrepreneurship. Differences in risk aversion provide a plausible and intuitive interpretation of entrepreneurial activity. In addition, a growing literature has begun to highlight the potential importance of overconfidence in driving entrepreneurial outcomes. Such a mechanism may appear at face value to work like a lower level of risk aversion, but there are clear conceptual differences-in particular, overconfidence likely arises from behavioral biases and misperceptions of probability distributions. Finally, nonpecuniary taste-based factors may be important in motivating both the decisions to enter into and to persist in entrepreneurship.

Abstract—How does online advertising become less effective than advertisers expect and less effective than measurements indicate? The current research explores problems that result, in part, from malfeasance by outside perpetrators who overstate their efforts to increase their measured performance. In parallel, similar vulnerabilities result from mistaken analysis of cause and effect-errors that have become more fundamental as advertisers target their advertisements with greater precision. In the paper that follows, the author attempts to identify the circumstances that make advertisers most vulnerable, notes adjusted contract structures that offer some protections, and explores the origins of the problems in participants' incentives and in legal rules.

Highway to Success: The Impact of the Golden Quadrilateral Project for the Location and Performance of Indian Manufacturing

By: Ghani, Ejaz, Arti Grover Goswami, and William R. Kerr

Abstract—We investigate the impact of the Golden Quadrilateral (GQ) highway project on the Indian organized manufacturing sector using enterprise data. The GQ project upgraded the quality and width of 5,846 km of roads in India. We use a difference-in-difference estimation strategy to compare non-nodal districts based upon their distance from the highway system. We find several positive effects for non-nodal districts located 0-10 km from GQ that are not present in districts 10-50 km away, most notably higher entry rates and increases in plant productivity. These results are not present for districts located on another major highway system, the North-South East-West corridor (NS-EW). Improvements for portions of the NS-EW system were planned to occur at the same time as GQ but were subsequently delayed. Additional tests show that the GQ project's effect operates in part through a stronger sorting of land-intensive industries from nodal districts to non-nodal districts located on the GQ network. The GQ upgrades further helped spread economic activity to moderate-density districts and intermediate cities.

Abstract—Entrepreneurship research is on the rise, but many questions about its fundamental nature still exist. We argue that entrepreneurship is about experimentation: the probabilities of success are low, extremely skewed, and unknowable until an investment is made. At a macro level, experimentation by new firms underlies the Schumpeterian notion of creative destruction. However, at a micro level, investment and continuation decisions are not always made in a competitive Darwinian contest. Instead, a few investors make decisions that are impacted by incentive, agency, and coordination problems, often before a new idea even has a chance to compete in a market. We contend that costs and constraints on the ability to experiment alter the type of organizational form surrounding innovation and influence when innovation is more likely to occur. These factors not only govern how much experimentation is undertaken in the economy, but also the trajectory of experimentation, with potentially very deep economic consequences.

By the end of 2013, Apple had $137 billion in cash and marketable securities. This case explores how companies can generate such large amounts of cash and how and if they should distribute it to shareholders, especially in the face of shareholder pressure. In the process, students are asked to undertake fundamental financial analyses, including ratio analysis, a financial forecast, and a cash distribution analysis.

In May 2013 the co-founders and co-CEOs of salaUno, Javier Okhuysen and Carlos Orellana, were encouraged by the results of their fledgling start-up. salaUno was founded as a for-profit enterprise in order to have the capital needed for rapid growth and to fulfill its mission of eliminating needless blindness in Mexico. salaUno had grown from doing 75 cataract surgeries in its first month of operation to a high of 388 surgeries 21 months later. This case explores the challenges in scaling up a healthcare venture within a developing country.

IDFC was set up in 1997 to direct private finance to infrastructure projects in India. Over the years, it expanded its capabilities to become a "complete solutions provider" offering financing solutions including debt and equity, investment banking, brokerage, and asset management services to clients in the infrastructure sector. With nearly 50% of its employees joining through acquisitions, there were significant cultural differences within the company. In 2009, the company embarked on a journey to build "One-Firm" with a unifying culture and governance system across business groups. IDFC aimed to provide seamless access to products and expertise across business groups, increase its competitive position, and maximize interactions with its clients. A critical component of the One-Firm initiative was a technology-enabled performance management system that articulated metrics for individual and group performance and aligned these with the overall performance of IDFC. While the new system had several strengths, it also raised questions on whether a common system allowed IDFC to recognize and retain talent across its diverse businesses. This case examines whether a uniform performance management system provided the autonomy and flexibility needed to build a culture of high performance across varied business groups.

Katie Kotkins, director of Memorial Sloan Kettering Cancer Center's (MSKCC) Cycle for Survival fundraising event, had to determine the best avenue for continuing the event's success and momentum after its founder, Jennifer (Jen) Goodman Linn (HBS '99), passed away from MFH sarcoma. Jen and her husband, David Linn (HBS '00), had founded Cycle for Survival in 2007 as a way for Jen to give back to the community of doctors that had treated her since her diagnosis in 2003. The indoor cycling event had grown rapidly and increased fundraising from $250,000 in 2007 to $4.7 million in 2011. After the event's second year, Jen and David made the decision to hand over control to MSKCC, partner with Equinox, and expand the event's fundraising efforts. At the time of Jen's passing Kotkins was focused on the 2013 event but was faced with a series of strategic questions after losing the event's face and inspiration.

To create the world's healthiest workforce, diversified health care giant Johnson & Johnson (J&J) mandated participation in its "Culture of Health" program globally, customized by location, culture, and specific health needs to offer prevention-focused education, rewards for healthy behavior, and workplace environments that encouraged healthy employee behavior. By 2015, 90% of J&J's 128,000 employees would participate in Culture of Health programs; 80% would know their key health indicators (e.g., blood pressure, body-mass index, blood sugar, cholesterol); and 80% would have a "low risk" health profile. To hit these goals, J&J managers in 2014 sought to 1) reduce national variation in program adoption and popularity, 2) do more to help employees ensure their overall-physical, mental, and spiritual-health, and 3) accurately measure the investments in and return on the program.

At the close of open-enrollment in March 2014, Kevin Counihan, CEO of Access Health CT, Connecticut's state health insurance exchange, stops to consider the success it has experienced so far and to think about how to ensure its long-term sustainability.

In late 2009, Marisa worked in acquisitions at Douglas Private Equity Advisors. During the first year Marisa spent a lot of her time reviewing documents, making site visits, and running numbers, using a sophisticated software program called ARGUS. Douglas did not have a formal training program, but in doing this financial analysis, Marisa received lots of mentoring from the vice presidents she worked with. Marisa believed that she had done well and would soon be promoted so that she could originate her own deals. However, she is confronted by a vice president to go against her own assumptions to "make the numbers work."

In 2013, Babcock International Plc (Babcock) was the largest engineering services provider in the UK with sales of over £3 billion. Under the leadership of CEO Peter Rogers, Babcock had grown revenues and profits nearly tenfold over the previous decade as it benefited from increased public sector outsourcing. In 2012, for the UK's Ministry of Defense (MOD), Babcock trained over 50,000 troops, maintained the nuclear submarine fleet, provided engineering support for military vehicles, and managed numerous facilities at military bases. On the civil side, the company decommissioned aging nuclear plants, maintained the Metropolitan Police auto fleet and other emergency services fleets, and was the UK's leading trainer of engineering apprentices. Babcock's leadership team believed that continued pressure on public spending would provide opportunities for double-digit growth in the UK for at least five years. However, this might not come from Babcock's primary customer, the Ministry of Defense. What other national and local government agencies might the firm target? On the civil side, the resurgence of the salience of nuclear power generation in the mid 2000s had appeared to be good news for Babcock with its long-standing nuclear expertise, but the April 2011 Fukushima nuclear leak in Japan had shed doubt on future construction, while the fracking of shale deposits to extract natural gas promised a much lower-cost supply of abundant energy. Nevertheless, decommissioning nuclear power stations promised steady and growing work. What other opportunities might Babcock pursue in the UK? Meanwhile, analysts were pushing for more international expansion, but efforts at building business in South Africa, Canada, and Australia had been slow, with only 16% of revenues coming from outside the UK in 2013, a figure little changed since 2005. What would drive Babcock's long-term future growth? Growth itself also posed challenges. Babcock relied heavily on informal processes to extract synergies across its portfolio. Would this continue to be effective as the scope of operations continued to expand? Meanwhile, analysts were concerned about succession. Rogers and many of the leadership team were approaching retirement. Where would the next generation of Babcock leaders come from?